Europe - HVS Hotel Valuation Index

HVS, the world’s leading hospitality consulting and valuation firm, is pleased to deliver the 2016 Hotel Valuation Index (HVI). The HVI is a hotel valuation benchmark developed by HVS. It monitors annual percentage changes in the values of typically four-star and five-star hotels in 33 major European cities. Additionally, our index allows us to rank each market relative to a European average. All data presented are in euro, unless otherwise stated.

The methodology employed in producing the HVI is based upon actual operating data from a representative sample of four-star and five-star hotels. Operating data from STR were used to supplement our sample of hotels in some of the markets. The data are then aggregated to produce a pro forma for a typical 200-room hotel in each city. Using our experience of real-life hotel financing structures gained from valuing hundreds of hotels each year, we have determined valuation parameters for each market that reflect both short-term and longer-term sustainable financing models (loan to value ratios, debt coverage ratios, real interest rates and equity return expectations). These market-specific valuation and capitalisation parameters are applied to the EBITDA less FF&E Reserve for a typical upscale hotel in each city. In determining the valuation parameters relevant to each of the 33 cities included in the European HVI, we have also taken into account evidence of actual hotel transactions and the expectations of investors with regards to future changes in supply, market performance and return requirements. Investor appetite for each city at the end of 2016 is therefore reflected in the capitalisation rates used and investment yields assumed.

2016 was a year to remember for some, one to forget for others. In the midst of a political landscape busily reinventing itself, uncertainty is the buzzword of the moment. And while some exert caution with a wait and see attitude, others open their wallets to take advantage of the opportunities out there. We attempt to summarise so much into a few salient points.

Consolidation

  • Marriott, Accor, HNA…many companies were kept busy with intense merger and acquisition moves over 2016. So much so that about one-third of full-service branded hotels were involved in a transaction during the year. With increased scale perceived as the way forward for growth, and also partly as a solution to challenges such as sharing platforms or OTAs (online travel agents), more changes in ownership are likely to continue to take place in 2017.

Tourism Dynamics

  • Despite the many upheavals in Europe, including challenges over safety and security, tourist arrivals to the continent continued to increase, albeit most likely at lower levels than would have been recorded in a more stable year. By the third quarter of 2016, most destinations across the region recorded positive results, with some destinations such as Spain and Portugal even enjoying double-figure growth in arrivals. France also remained the most visited country in the world in 2016, despite some tumultuous events.

Hotel Performance

  • RevPAR growth has remained strong across most European markets, with a few exceptions such as Paris, Milan, Brussels and, to a lesser extent, London. Given the European hotel pipeline, which remains subdued at around 3% (compared to the double-figure pipelines of the other continents), and continuing increases in demand for Europe, we forecast improvement in performances to continue in 2017, albeit potentially at a slower pace for a number of markets.

Disruptors

  • Technology continued to move and shake the hotel industry over the past year, and enforced regulations on Airbnb in various markets (Dublin, Paris, Barcelona, London, Amsterdam and others) may or may not affect the everchanging rules of the game. Parallel to this, hotel companies have been launching campaigns to lure customers to book with them directly, with unclear long-term effects in rate.

Transaction Volume

  • In 2016, total European hotel transaction volume reached €17.7 billion, a 26% reduction on the record volume achieved in 2015 – but still the second largest volume recorded since pre-crisis levels in 2006/07. Germany’s performance eclipsed that of the UK, owing to the sale of an impressive €2.45 billion worth of portfolio assets – an increase of almost 30% compared to a fall in UK portfolio transactions of around 83% (in euro, reflecting the year-on-year 11% loss in value of sterling). London continued to be the leading European hotel transaction market, with a total volume of around €1.8 billion, ahead of Paris’ €1.1 billion, although there are sound reasons for the French capital being somewhat out of favour at the moment. Finally, 83% of total investment volume was acquired by European players, with a large fall in North American, Middle Eastern and Asian investment. Please refer to our sister publication 2016 European Hotel Transactions for more details.

Capitalisation Rates

  • Following on from the previous comment, investor appetite continued to put pressure on capitalisation rates across a number of markets, as improving performance and limited pipeline allowed for income growth to be built into valuations.

Hotel Values

  • European average values per room are still some 10% lower than those recorded in the peak of 2006/07. Although the German markets have all, for example, risen well above the peak values (close to 30% higher on average), Eastern European markets still need to gain a further 20% rise in values to reach their former peak figures.

Hotel values in Europe still have some room for growth, as markets, such as some of the PIGS countries (Portugal, Italy, Ireland, Greece and Spain), for example, continue to climb the value ladder to their rightful positions. The prospect of rising inflation in the UK, as a result of Brexit, indicates that the time for an upward movement in interest rates might be near. An increase in capitalisation rates for the UK is therefore likely, whilst for Europe a number of markets would still be expected to experience a tightening of yields (potentially Germany, or Spain again). As previously indicated, a subdued pipeline, coupled with decent demand growth, and room for rises in value compared to ten years ago, all bode well for Europe in 2017, although with moderation.

Generally, 2017 could be another solid year for foreign investment in Europe. As the price of oil might start to slowly recover, this could have positive repercussions for Middle Eastern investment. Also, whilst capital controls imposed by China for ‘non-core’ business investment might pose some challenges, European returns remain attractive to Chinese investors, with a weaker Renminbi, whose interest in trophy assets in key gateway cities is expected to remain solid going forward. Another action-packed year has just started.

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